The Fed hesitates??

There is growing speculation about whether or not Fed chairman Ben Bernanke will bring the current cyle of increases in the federal discount rate to an end in their soon to be announced decision or whether they will continue the boost in rates while making it clear that the round of rate increases is soon top be over. the Fed meets this Wednesday. The next interest rate decision after this one is June28/29th. If the fed raises the rate to 5 % this will be the highest rate in five years which brings us back to the slow growth high unemployment days of 2001.The high rates may have the same effect this time.

As usual the money markets hang on every rumour and influential statistic. It would be a good thing for the American economy and the global economy for that matter, if Bernanke would bring the cycle of interest rate rises to an end before damage is done in terms of slower growth and rising unemployment.

The rumour mills also suggest that the European central bank foolishly is going to raise rates again thereby guaranteeing the excessive unemployment in France and Germany is going to continue and perhaps grow worse. Not a comforting thought for President Chirac or German Chancellor Merkel.

Chirac has very sensibly killed the new employment first job legislation which would have only worsened unemployment and hardship for young workers and job seekers, contrary to the conventional wisdom. But to make progress on the unemployment front he needs help on moderating or reversing interest rate increases from the European central bank and some fiscal policy assistance from the leading European governments.

Here again the rules which restrict the members to deficits which cannot exceed 3 % of the GDP are not helpful and have, will and should be breached if necessary to lower unemployment.

We shall see if Ben Bernanke can send out the appropriate signal to maintain solid growth and lower unemployment in America while perhaps influencing Europe in the right direction.

If Bernanke freezes rate increases watch for the exchange rate on the Canadian dollar to rise   sharply as the Canadian dollar continues its march toward parity with the US dollar. Great for vacations in New York but very bad for Canadian manufacturing exporters in Ontario and Quebec.

Whatever productivity increases that can be facilitated by cheaper imports of technology and machinary will take time to put in place and also disrupt employment.In the meantime an expensive Canadian dollar and a cheaper American one will squeeze manufaturing exporters big time.

The dualistic nature of the Canadian economy, white hot in Alberta and the West, cold and gloomier in the East will grow stronger.